Contents CURRENT STATE OF INFLATION
MAIN REASONS OF INFLATION
NOTIONAL LOSSES
STEPS TO CONTROL FOOD INFLATION
FUTURES TRADING
RETAIL PRICES OF SOME ESSENTIAL COMMODITIES
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CURRENT STATE OF INFLATION Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. The most well known measures of Inflation are the CPI which measures consumer prices, and the GDP deflator, which measures inflation in the whole of the domestic economy. It is a major source of data and we expect, as it is incorporated into various models, that people le use it to track the economy.
The inflation rate in India was last reported at 9.5 percent in March of 2012. From 1969 until 2010, the average inflation rate in India was 7.99 percent reaching an historical high of 34.68 percent in September of 1974 and a record low of 11.31 percent in May of 1976.
The inflation rate in India as measured by the Wholesale Price Index (WPI) has been rising continuously over the past three years. Inflation in food products has driven overall inflation. As per the latest data, overall WPI Inflation stood at a 9.5 per cent in March 2012. In the week ending April 22,, 2012, food inflation stood at 9.9% per cent.
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WPI Inflation (year-on-year)
All Commodities Food
2006-07
2007-08
2008-09
2009-10
5,114.15
5,017.80
5,124.75
4,988.00
10,061.25
9,939.60
10,084.45
9,749.30
Food Inflation rate from January to April 2012 January 5.53% On the back of low price of fruits & vegetables, egg, gram, moong and condiments & spices, India’s food inflation for the week ended January 14, 2012 has fallen to -1.03 % while the annual rate of inflation was down to 1.89% for the week ended 14th January as against 2.47% the previous week . The index for ‘Food Articles’ group rose by 0.3% to 191.4 from 190.9 for the previous week due to higher prices of bajra, fish-marine and jowar, ragi and barley and wheat, maize and milk. While, the prices of fruits & vegetables, egg, gram, moong and condiments & spices declined. The index for ‘Non-Food Articles’ group declined by 1.5% to 179.9 from 182.6 for the previous week due to lower prices of flowers, raw cotton, sunflower and raw rubber, castor seed and copra.. While, the prices of gaur seed, groundnut seed, and raw jute, coir fiber, linseed, soybean, rape & mustard seed and Mesta moved up. Meanwhile, the index for ‘Minerals’ group rose by 0.7% to 325.1 from 322.8 for the previous week due to higher prices of zinc concentrate, copper ore magnesite and iron ore. However, the prices of dolomite and barytes declined.
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.February 6.07% The increase in inflation was mainly driven by the steep increase in food inflation which jumped to 6.07% in February compared to -0.52% in January. Food Inflation stood at 9.54% in the same month last year. Potato and Onion prices were dropped by 43.13%, 2.22% and 48.50% respectively in February while prices of pulses, vegetables, protein items, milk, rice and cereals were increased by 7.91%, 1.52%, 20%, 11.7%, 1.53% and 1.71% respectively. Food inflation has 14.3% weight in the overall WPI. Prices of manufactured items, which have a weight of around 65% in the WPI basket, were increased by 5.75% in February. With this increase, inflation has again started its upward movement after some continuous fall. After this increase, RBI may not cut rates just now during its next policy review meeting scheduled to be held tomorrow.
March 9.94% While Food inflation stood at 9.94% in March compared to 6.07% in February, non-food manufactured inflation dropped to 4.87% in March compared to 5.7% in February. Food articles have 14.3% share in the WPI basket which has kept the overall inflation at nearly 7%.Onion prices were declined by 24.23% in March. Prices of protein items, pulses, vegetables, milk, potato, rice and cereal were increased by 17.71%, 10.05%, 30.57%, 12.59%, 11.6%, 4.73% and 4.41% respectively in the same month.
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April 9.9% Food inflation accelerated to its highest in more than three months, making it difficult for the Reserve Bank of India to pause interest rate hikes despite global economic uncertainty and deceleration in industrial growth. Inflation has been very volatile and right now monsoons have triggered additional transportation problems for food products. Perishables are mostly generating the price spikes now. Food inflation accelerated to its highest in more than three months, making it difficult for the Reserve Bank of India to pause interest rate hikes despite global economic uncertainty and deceleration in industrial growth. Prices rose 9.9% for the week ended July 30 from a year ago, the highest rate of increase since the third week of April.
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India Industrial Production Industrial Production in India declined 3.5 percent in March of 2012. Industrial production measures changes in output for the industrial sector of the economy which includes manufacturing, mining, and utilities. Industrial Production is an important indicator ator for economic forecasting and is often used to measure inflation pressures as high levels of industrial production can lead to sudden changes in prices. From 1994 until 2010, India's industrial production averaged 7.49 percent reaching an historical high gh of 17.70 percent in December of 2009 and a record low of -0.20 20 percent in December of 2008.
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FALSE CLAIMS Food demand in an economy like ours naturally grows over time. In order to keep pace with population growth, food production also needs to grow. However, in India, food production and availability have not grown commensurately. In 2008-09, annual per capita cereal availability in India was only around 165 kg, which was that of the same level as in 2000-01. In contrast, per capita cereal availability in China was over 290 kg in 2008-09, and in the US it was over 1000 kg. Moreover, per capita cereal availability in India fell to 161 kg in 2009-10, despite high GDP growth. Therefore food consumption for the entire population is certainly not witnessing any rise. What is happening is that income and consumption growth is getting disproportionately concentrated within the top 10 to 15 per cent of the population, who are benefiting from GDP growth. For the bulk of the Indian people, consumption levels are getting further squeezed. If 77 per cent of the Indian population is spending less than Rs 20 per head a day as per the Arjun Sengupta commission report, one can well imagine what the consumption levels of the majority of Indians are. Widespread hunger and malnutrition is the reality of India. India continues to be home to around 25 per cent of the world’s hungry population currently estimated at 925 million by the UN World Food Programme. Nearly half of India’s children under three years of age continue to remain malnourished, as per the National Family Health Survey, alongside half of pregnant mothers who are anemic. Food price inflation is making matters worse for these sections by squeezing their consumption levels.
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MAIN REASONS OF INFLATION There are four main reasons. The immediate reason for the spurt in the prices of specific food items, like onions today or earlier in the case of sugar and pulses, is hoarding. Trader cartels, encouraged by an inept government, are mainly responsible for this. Assured of inaction, hoarders are creating artificial shortages and fleecing people from time to time.
Secondly, the growing penetration of big corporates in the food economy, international trade in food items and speculative futures trading in agricultural commodities has weakened the government’s capacity to control food prices. The share of corporate retail in food distribution has tripled over the past four years. The government has manipulated trade policies to allow big traders to make huge profits through export and import of essential food items like wheat, sugar and onions. On the other hand, the PDS has been weakened considerably through targeting. In most states, the role of the ration shops, state agencies like the NAFED etc and consumer cooperatives in food distribution, has been whittled down. Therefore, the profit margins of private traders have also increased, reflected in growing gaps between wholesale and retail prices as well as farm-gate and wholesale prices.
There are medium and long-term reasons too. Our agriculture is in a crisis. We are not producing enough to meet the needs of a growing population. The peasantry continues to be in distress, with 2.5 lakh farmers committing suicide over the past 15 years. State intervention in raising agricultural productivity has been weakened. The government is more interested in handing over this role to big agribusinesses and retail giants like Walmart and Monsanto in the name of a ‘second green revolution’. That will further marginalise the small peasants.
Finally, the cuts in subsidies and price hikes of inputs like diesel and fertilizer are also contributing to food inflation. The deregulation of petrol prices has led to very steep hikes in the recent weeks.
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NOTIONAL LOSSES The so-called ‘under-recoveries’ of oil companies cited by the government are notional losses. In actual terms the oil companies are not making such losses. The international crude oil price is currently ranging between 85 to 90 dollars per barrel, which comes to around Rs 25 per litre (1 barrel = 159 litres and 1 dollar = 45 rupees). However, the retail price of petroleum ranges between Rs 58 to Rs 63 per litre in the metro cities. This huge difference between crude oil prices and the retail price of petrol is on account of taxes, over Rs 30 per litre of which is collected by the central government through customs and excise duties. If we take these taxes into account, the government earns much more in taxes on petrol and diesel than it spends on fuel subsidies. If the government cuts these indirect taxes, the fuel prices would not rise. The government does not want to cut these taxes, because otherwise it has to impose more direct taxes on the rich and the corporates. Therefore the government is passing the burden on to the people. After petrol prices were deregulated in June 2010, petrol prices have been raised seven times by the oil companies, the last time being in January 2011, amounting to an increase of over Rs 10 per litre in seven months. Increase in fuel prices have been adding to inflationary pressures.
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STEPS TO CONTROL FOOD INFLATION The present steps being undertaken by the government are inadequate. What we need is a long-term strategy to fight inflation. The first step should be to strengthen state intervention in the food economy, both in food distribution and production. The government is dithering on the food security legislation. The food security act should be passed without further delay, which must ensure universal food security. The government is currently holding stocks of nearly 50 million tones of rice and wheat, which is way above the buffer norms. 35 kgs of food grains per month should be supplied through a universalized PDS at Rs 2 per kg and not limited to the arbitrarily determined BPL families. Moreover, other essential commodities like sugar, pulses and edible oils should be supplied at fixed rates across the country through the PDS.The government has been sitting on the recommendations of the National Farmers’ Commission for the past five years. The Farmers’ Commission had made several suggestions to make farming remunerative for the peasantry and step up public investment in agriculture, as well as agricultural storage and marketing. Besides supporting farmers, government agencies, cooperatives and self-help groups should be supported to open more outlets to sell food items like vegetables, milk etc. Raising agricultural productivity and modernization of storage and marketing of agricultural products cannot be left to the private corporates and MNCs. Inflation cannot be controlled with liberalized trade and private profiteering in food items. The influence of private corporates and traders in the food economy needs to be curbed. For this it is essential for the central government to take the state governments on board and coordinate measures against hoarding and blackmarketing. In this regard, it is also important to prohibit commodity futures trading in food articles, because such trading facilitates speculation on food prices. Finally, the costs of agricultural inputs like fuel and fertilizers have to be controlled by the government. Deregulation of fuel and fertilizer prices will raise agricultural costs and contribute to food inflation. The government must continue to subsidize fuel and fertilizer and rationalize the taxes on petroleum products. The decision to deregulate petrol prices needs to be reversed.
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FUTURES TRADING Futures trading is linked to inflationary expectations in the economy. Futures are contracts made between sellers and buyers for sale/ purchase of a fixed quantity of a commodity at a fixed price at a future date. What commodity futures markets do is to enable selling and buying of these contracts on a daily basis, like in the stock market. So, a future contracts of say 10 kg of sugar to be delivered in May 2011 at Rs 30 per kg, can sell at more or less than Rs 30 per kg in January 2011. Someone, for example, buys the contract at Rs 29 per kg today, because sugar prices are expected to fall in the coming months. However, in the coming months international sugar prices can rise, may be because the sugar crop from, say Brazil, fails this year. Then demand for sugar contracts in Indian futures market will also rise and the person who bought sugar at Rs 29 per kg can sell it in March 2011 at, say Rs 35 per kg, making a windfall profit of Rs 6 per kg without having to either produce or consume a single grain of sugar. Moreover, when sugar prices rise in the futures market in India, sugar traders expect to make profits (a) by exporting sugar abroad (b) by hoarding sugar so that there is scarcity in the domestic market, which eventually increases domestic sugar prices. The commodity futures markets therefore achieve two things. First, they link domestic food prices to the volatile international commodity markets. Second, they provide avenues for pure speculators, who have nothing to do either with production or trade in food, to emerge as major players and make capital gains by speculating on food prices. With the advent of multi-commodity exchanges in India since 2002-03 and the commencement of online trading, commodity futures trading have grown manifold. Like most countries across the world, the people who are investing in these markets are not farmers, but big players of the financial markets who are only interested in making speculative gains. The government was forced to suspend futures trading in some essential commodities like rice, wheat, sugar and some pulses in 2007 due to the pressure from the Left Parties. However, futures trading in wheat and sugar have once again been allowed by the government. India is a food deficient country. Our productivity levels are low and we are not producing enough to meet the demands of a growing population. Moreover, our agricultural production is heavily dependent on the weather and above or below normal rainfall (floods and drought), significantly affects the supply of agricultural commodities. Storage capacity in India is also limited and many food items cannot be stored because of lack of modern storage facilities. In this backdrop, futures trading in food items distort the price signals and encourage speculation and hoarding, thus contributing to food inflation. Therefore, in order to control food inflation, futures trading in food articles need to be prohibited.
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RETAIL PRICES OF SOME ESSENTIAL COMMODITIES IN DELHI: 2009 TO 2012 (RS/KG) Item
Retail Price (endJanuary 2012)
Retail Price (endJanuary 2011)
Retail Price (endJanuary 2010)
Retail Price (endJanuary 2009)
Rice Wheat Atta Chana Dal Arhar Dal Moong Dal Masoor Dal Sugar Milk (Rs./litre) Groundnut Oil Mustard Oil Vanaspati Tea Loose Salt Pack (Iodized) Potato Onion
23 15.5 17 35 69 68 54 34 25 135 79 77 149 13 10 33
23 16 18 38 84 81 62 42.5 22 113 71 57 156 12 9 23
22 13 14 35 50 45 62 23 21 109 77 54 144 11 8 21
17 13 14 35 42 36 39 17 20 121 69 67 107 10 8 9
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